July 27 (Bloomberg) -- Rhode Island Treasurer Gina Raimondo championed an overhaul last year of one of the nation’s worst-funded public pensions, setting out a road map for states and cities by curbing benefits and delaying retirements.
Now the revamp, which took effect this month, is facing a legal challenge from unions. If successful, the lawsuit could produce fiscal “devastation” by spurring more municipal bankruptcies in a state already on the verge of falling back into recession, according to Raimondo, a 41-year-old Democrat.
While the court action may take months or years, it’s being closely watched as it may provide guidance in other states where similar legal battles have arisen, said Amy Monahan, who teaches law at the University of Minnesota in Minneapolis. Rhode Island is also unusual because, unlike in California, where court rulings have sided with labor to protect benefits, there is little precedent to guide the outcome, she said.
“Other state courts will watch because they’d love to come up with a way to address this area that makes sense,” Monahan said, calling it “a compelling case.”
“Rhode Island has it all: a poorly funded plan and really widespread changes,” she said.
$4.6 Trillion Gap
The law provided “a dramatic punctuation” to efforts by U.S. state and local governments seeking to control retiree costs as pension-plan losses drained assets, said Ronald Snell, a senior fellow at the National Conference of State Legislatures in Denver. Estimates of the collective unfunded liability run as high as $4.6 trillion.
Cuts affecting public workers have been made in more than 40 states since the financial crisis, typically targeting newly hired employees because of legal or contractual restraints, according to the legislatures group.
In Rhode Island, five unions representing state and municipal workers, teachers, firefighters and police claim that the law violates their constitutional rights by breaking contracts and taking away benefits earned by retirees and workers. The groups also say Raimondo manufactured a crisis by lowering pension investment-return assumptions, increasing unfunded liabilities and forcing lawmakers to back the cuts.
“Gina Raimondo, who I am personally fond of, did a phenomenal job of equating the unfunded pension liability as if it were a weapon of mass destruction,” said Robert Walsh, the executive director of the National Education Association of Rhode Island, the teachers’ union that has sued. “The political tide was unstoppable once that connection was made.”
Raimondo gained celebrity status by engineering the overhaul. She was featured in Time magazine, and earned awards and recognition from public-policy groups. She rose in voter surveys, becoming Rhode Island’s most-popular politician. The accolades reflected both her willingness as a political neophyte to buck her party and take on unions as well as her success in winning passage for far-reaching pension changes.
By delaying retirement, suspending cost-of-living increases and offering workers 401(k)-type savings plans, Rhode Island cut its pension obligations by $3 billion, to $4.3 billion, and lowered the state’s required annual contribution by $275 million, to $414 million. In 2007, the system was judged by Bloomberg Rankings to be the least funded of any state, with 54 percent of assets needed to cover projected liabilities.
“She deserves credit along with others,” said David Walker, president of the Comeback America Initiative, a nonprofit public-policy group in Bridgeport, Connecticut. “She had the courage to campaign on the need for pension reform and to make tough choices, even in the face of significant union opposition.”
Labor leaders promised to sue to block the changes as soon as Governor Lincoln Chafee, elected as an independent in 2010, signed the overhaul law in November. They made good on their threats last month, taking the issue to court days before the law took effect July 1.
Rhode Island Superior Court Judge Sarah Taft-Carter rejected a request to block the changes while the dispute is litigated. The complaints brought by the five unions have been consolidated into a single action, according to Craig Berke, a court spokesman. The unions continue to seek an injunction to block enforcement, according to court records.
The stakes are high in Rhode Island, which has dealt with six-straight budget deficits and has the second-highest unemployment rate in the U.S., according to Labor Department data. One city, Central Falls, sought protection in U.S. Bankruptcy Court in Providence last year, citing pensions it couldn’t afford. The state has taken over the finances of two others, Woonsocket and East Providence.
$100 Million Cost
Raimondo told reporters in April that overturning the law would mean cities and towns would have to contribute an additional $100 million to the pension system this year for teachers and other workers, potentially pushing more into bankruptcy. The state would also have to boost its contribution.
“You will see devastation, I believe, in municipalities not being able to pay those bills,” she said on WPRI-TV’s Newsmakers program.
At the same time the former venture capitalist, who has a law degree from Yale University in New Haven, Connecticut, has said she’s confident the overhaul will withstand the challenge.
“We had to do this,” she said in an interview earlier this year. “It served a public purpose. If I didn’t think we were on a good legal standing, I wouldn’t have done this.”
The overhaul she led prompted Chicago Mayor Rahm Emanuel, President Barack Obama’s former chief of staff, to consult with Raimondo about changes proposed in Illinois. Governor Pat Quinn, a Democrat whose state had the worst-funded retirement system in 2010, has been trying to craft a proposal that would withstand legal challenges, yet he has been unable to get lawmakers on board. Emanuel is backing Quinn’s efforts.
Rhode Island’s tax-exempt debt has earned almost 4.7 percent this year, trailing the returns of 37 U.S. states and territories and the 5.4 percent advance for the $3.7 trillion municipal-debt market, according to Barclays Capital data.
Union leaders in Rhode Island participated in an advisory group Raimondo set up to craft the changes, and some testified against the proposal in legislative hearings last year. Labor groups say that there are other ways to strengthen pension funding while still balancing the budget and helping cities and towns, citing tax increases as an example.
“If the unions prevail, that means the state broke the law,” said Ken DeLorenzo, executive director of Rhode Island Council 94 of the American Federation of State, County and Municipal Employees, which represents about 8,000 local and state workers. “It’s not necessarily the unions’ fault the state broke the contract.”
In Providence, the state capital, the City Council sought to prevent insolvency by passing a law in May modeled on Raimondo’s plan. Instead of awaiting a court challenge, Mayor Angel Taveras hammered out a deal with the city’s unions and retirees, putting in place much of what the legislation mandated. The agreement cut the unfunded pension liability by $170 million and reduced the required annual contribution by $18.5 million.
“She’s a smart politician,” Walsh said. Yet, he said, “she didn’t take the opportunity to consider all the reasonable alternatives.” Raimondo’s proposals were unreasonably harsh, and the Providence agreement may provide a precedent for a negotiated, out-of-court solution, he said.
“With credit comes blame,” Walsh said. “How the treasurer deals with this will determine her political future.”
The case is Rhode Island Public Employees Retiree Coalition v. Chafee, 12-3166, State of Rhode Island Superior Court (Providence).
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